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November 6th Weekly Recap

Special Weekly Recap Report

Week-End Savant Report Summary

November 6, 2015
By Jordan Wirsz

As I write this, I’m headed up north on a short vacation into Utah where I have a mountain home at 8,500 feet elevation which had about 5 inches of snow dumped in the last few days…Snow in the west, and it isn’t even Thanksgiving yet! Much of the west saw snow this week, and most people are looking at El Nino as the likely cause of a very wet or snowy winter. This week, the agriculture markets are in my view given all of the crazy weather around the U.S. As with everything in life, weather is also a “cycle”. Weather for farmers is as much of a crap shoot as shooting craps in Las Vegas. Too much rain, and your crop is in trouble. Not enough rain, your crop is in trouble…Hail? More trouble… It doesn’t end for farmers. From 2000 to 2012, the agriculture markets saw land prices boom, and grain prices hit incredible highs in 2012. But since then, the commodity markets in general have been hit hard, and specifically grain prices.

There are the grain analysts who predict global supply and demand metrics accounting for everything from weather to crop yields to forecasting China’s grain orders, etc. But at the end of the day, its all a cycle that we knew was coming to an end.

We saw corn prices at $7.50 levels, now trading in the mid to high $3’s.

We saw soybeans trade up to almost $18 levels, now trading sub $9.

Wheat was about $9, and traded sub $4, now trading just over $5.

The big story here however is not just grain prices, it is the culmination of grain prices, record crops, expensive inputs to get the crops, and weather… The story is about record high land prices, ag lenders who opened the purse strings for farmers who used equity in one piece of land as a down payment for another, as well as the incredibly high farm equipment prices that kept farmers balance sheets looking quite nice.

But now, there is a different dynamic. Farm equipment prices are falling, and falling hard. Record crops are expected, and according to a recent article in the WSJ (http://www.wsj.com/articles/u-s-farm-income-to-fall-to-lowest-level-in-nine-years-1440521337) U.S. farm income is set to drop 36% this year. Not only is farm equipment prices falling, severely damaging many farmers balance sheets, but land prices are also correcting…Some correcting harder than others, depending on the sale activity in the specific region. This could be a real “doozy” of a cycle for those who leveraged up with big loans to buy more land and high prices equipment.

Like with any kind of real estate, prices do not correct overnight… And it takes time for the problems to work their way through the system and get flushed out. The boom is not too dissimilar to what happened in U.S. real estate not too long ago in the late 2000’s. What *IS different, however, is that farmers tend to have a more conservative approach to borrowing, and many farmers will never exit their land holdings at any time, let alone in bad times, because it is a generational life-long business that is more of a way of life than a business. Albeit that many farmers won’t divest from agriculture assets at any time in their life, that still doesn’t make low grain prices, high input costs, expensive and quickly depreciating equipment, declining land prices and moderate to high leverage and easy combination to handle for even the most formidable farmers.

The agriculture cycles can happen quickly… But the real estate cycles do not. Thus, it may be several years before the kinks are worked out in the farmland markets. In fact, I published an article citing research showing that Iowa, some of the most coveted farmland in the nation, was declining at double digit paces year over year from 2014 to 2015.

The agriculture cycle is one to stay clear of at present time… Bottom pickers are likely going to get hurt here if they aren’t careful. The commodity cycle is almost perfectly juxtaposed to the U.S. residential and commercial real estate cycle. So, we expect the agriculture market to remain in tough times until at least 2020, if not a few years more. Perfectly timed, an exit from traditional real estate investments in the early 2020’s could transition directly into farmland at the right time. The exact timing has yet to be seen, but it seems like a plausible long term investment strategy at present. Although the farmland and commodity super cycles have historically been 30 years, my believe is that the cycles are shortening due to growing population, higher velocity and availability of capital, ability for large institutions to speculate with investments in the multi-billions, etc.

Inflation has remained low – despite the agriculture cycle boom in prices in 2012. That means that the economy will do well while the commodity producers will not.

The run-a-way inflation that many people thought was coming in the gold glory days of $1900/oz on pure speculation that the U.S. dollar would collapse, simply never came. Now, the U.S. dollar is strong, and likely to get even stronger. This means more bad news for U.S. farmers, as that makes exports that much more difficult for foreign customers to swallow.

The U.S. dollar is now almost at parity with many currencies, today, trading over $.98.

The Aussie currency has declined (as I predicted) significantly. The Canadian dollar has declined (as I predicted) significantly. And although there may be corrections, I believe we are in a phase of the currency, economic, and commodity cycles that will keep some good support under the U.S. dollar if not push it much higher than we are today, over the next years to come.

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